Should we raise the minimum wage?

JDN 2456949 PDT 10:22.

The minimum wage is an economic issue that most people are familiar with; a large portion of the population has worked for minimum wage at some point in their lives, and those who haven’t generally know someone who has. As Chris Rock famously remarked (in the recording, Chris Rock, as usual, uses some foul language), “You know what that means when they pay you minimum wage? You know what they’re trying to tell you? It’s like, ‘Hey, if I could pay you less, I would; but it’s against the law.’ ”

The minimum wage was last raised in 2009, but adjusted for inflation its real value has been trending downward since 1968. The dollar values are going up, but not fast enough to keep up with inflation.

So, should we raise it again? How much? Should we just match it to inflation, or actually raise it higher in real terms? Productivity (in terms of GDP per worker) has more than doubled since 1968, so perhaps the minimum wage should double as well?

There are two major sides in this debate, and I basically disagree with both of them.

The first is the right-wing view (here espoused by the self-avowed “Objectivist” Don Watkins) that the minimum wage should be abolished entirely because it is an arbitrary price floor that prevents workers from selling their labor at whatever wage the market will bear. He argues that the free market is the only way the value of labor should be assessed and the government has no business getting involved.

On the other end of the spectrum we have Robert Reich, who thinks we should definitely raise the minimum wage and it would be the best way to lift workers out of poverty. He argues that by providing minimum-wage workers with welfare and Medicaid, we are effectively subsidizing employers to pay lower wages. While I sympathize a good deal more with this view, I still don’t think it’s quite right.

Why not? Because Watkins is right about one thing: The minimum wage is, in fact, an arbitrary price floor. Out of all the possible wages that an employer could pay, how did we decide that this one should be the lowest? And the same applies to everyone, no matter who they are or what sort of work they do?

What Watkins gets wrong—and Reich gets right—is that wages are not actually set in a free and competitive market. Large corporations have market power; they can influence wages and prices to their own advantage. They use monopoly power to raise prices, and its inverse, monopsony power, to lower wages. The workers who are making a minimum wage of $7.25 wouldn’t necessarily make $7.25 in a competitive market; they could make more than that. All we know, actually, is that they would make at least this much, because if a worker’s marginal productivity is below the minimum wage the corporation simply wouldn’t have hired them.

Monopsony power doesn’t just lower wages; it also reduces employment. One of the ways that corporations can control wages is by controlling hiring; if they tried to hire more people, they’d have to offer a higher wage, so instead they hire fewer people. Under these circumstances, a higher minimum wage can actually create jobs, as Reich argues it will. And in this particular case I think he’s right about that, because corporations have enormous market power to hold wages down and in the Second Depression we have a huge amount of unused productive capacity. But this isn’t true in general. If markets are competitive, then raising minimum wage just causes unemployment. Even when corporations have market power, if there isn’t much unused capacity then raising minimum wage will just lead them to raise prices instead of hiring more workers.

Reich is also wrong about this idea that welfare payments subsidize low wages. On the contrary, the stronger your welfare system, the higher your wages will be. The reason is quite simple: A stronger welfare system gives workers more bargaining power. If not getting this job means you turn to prostitution or starve to death, then you’re going to take just about any wage they offer you. (I don’t entirely agree with Krugman’s defense of sweatshops—I believe there are ways to increase trade without allowing oppressive working conditions—but he makes this point quite vividly.) On the other hand, if you live in the US with a moderate welfare system, you can sometimes afford to say no; you might end up broke or worse, homeless, but you’re unlikely to starve to death because at least you have food stamps. And in a nation with a really robust welfare system like Sweden, you can walk away from any employer who offers to pay you less than your labor is worth, because you know that even if you can’t find a job for awhile your basic livelihood will be protected. As a result, stronger welfare programs make labor markets more competitive and raise wages. Welfare and Medicaid do not subsidize low-wage employers; they exert pressure on employers to raise their low wages. Indeed, a sufficiently strong welfare system could render minimum wage redundant, as I’ll get back to at the end of this post.

Of course, I am above all an empiricist; all theory must bow down before the data. So what does the data say? Does raising the minimum wage create jobs or destroy jobs? Our best answer from compiling various studies is… neither. Moderate increases in the minimum wage have no discernible effect on employment. In some studies we’ve found increases, in others decreases, but the overall average effect across many studies is indistinguishable from zero.

Of course, a sufficiently large increase is going to decrease employment; a Fox News reporter once famously asked: “Why not raise the minimum wage to $100,000 an hour!?” (which Jon Stewart aptly satirized as “Why not pay people in cocaine and unicorns!?”) Yes, raising the minimum wage to $100,000 an hour would create massive inflation and unemployment. But that really says nothing about whether raising the minimum wage to $10 or $20 would be a good idea. Covering your car with 4000 gallons of gasoline is a bad idea, but filling it with 10 gallons is generally necessary for its proper functioning.

This kind of argument is actually pretty common among Republicans, come to think of it. Take the Laffer Curve, for instance; it’s basically saying that since a 99% tax on everyone would damage the economy (which is obviously true) then a 40% tax specifically on millionaires must have the same effect. Another good one is Rush Limbaugh’s argument that if unemployment benefits are good, why not just put everyone on unemployment benefits? Well, again, because there’s a difference between doing something for some people sometimes and doing it for everyone all the time. There are these things called numbers; they measure whether something is bigger or smaller instead of just “there” or “not there”. You might want to learn about that.

Since moderate increases in minimum wage have no effect on unemployment, and we are currently under conditions of extremely low—in fact, dangerously low—inflation, then I think on balance we should go with Reich: Raising the minimum wage would do more good than harm.

But in general, is minimum wage the best way to help workers out of poverty? No, I don’t think it is. It’s awkward and heavy-handed; it involves trying to figure out what the optimal wage should be and writing it down in legislation, instead of regulating markets so that they will naturally seek that optimal level and respond to changes in circumstances. It only helps workers at the very bottom: Someone making $12 an hour is hardly rich, but they won’t benefit from increasing minimum wage to $10; in fact they might be worse off, if that increase triggers inflation that lowers the real value of their $12 wage.

What do I propose instead? A basic income. There should be a cash payment that every adult citizen receives, once a month, directly from the government—no questions asked. You don’t have to be unemployed, you don’t have to be disabled, you don’t have to be looking for work. You don’t have to spend it on anything in particular; you can use it for food, for housing, for transportation; or if you like you can use it for entertainment or save it for a rainy day. We don’t keep track of what you do with it, because it’s your own freedom and none of our business. We just give you this money as your dividends for being a shareholder in the United States of America.

This would be extremely easy to implement—the IRS already has all the necessary infrastructure, they just need to turn some minus signs into plus signs. We could remove all the bureaucracy involved in administering TANF and SNAP and Medicaid, because there’s no longer any reason to keep track of who is in poverty since nobody is. We could in fact fold the $500 billion a year we currently spend on means-tested programs into the basic income itself. We could pull another $300 billion from defense spending while still solidly retaining the world’s most powerful military.

Which brings me to the next point: How much would this cost? Probably less than you think. I propose indexing the basic income to the poverty line for households of 2 or more; since currently a household of 2 or more at the poverty line makes $15,730 per year, the basic income would be $7,865 per person per year. The total cost of giving that amount to each of the 243 million adults in the United States would be $1.9 trillion, or about 12% of our GDP. If we fold in the means-tested programs, that lowers the net cost to $1.4 trillion, 9% of GDP. This means that an additional flat tax of 9% would be enough to cover the entire amount, even if we don’t cut any other government spending.

If you use a progressive tax system like I recommended a couple of posts ago, you could raise this much with a tax on less than 5% of utility, which means that someone making the median income of $30,000 would only pay 5.3% more than they presently do. At the mean income of $50,000, you’d only pay 7.7%. And keep in mind that you are also receiving the additional $7,865; so in fact in both cases you actually end up with more than you had before the basic income was implemented. The break-even point is at about $80,000, where you pay an extra 9.9% ($7,920) and receive $7,865, so your after-tax income is now $79,945. Anyone making less than $80,000 per year actually gains from this deal; the only people who pay more than they receive are those who make more than $80,000. This is about the average income of someone in the fourth quintile (the range where 60% to 80% of the population is below you), so this means that roughly 70% of Americans would benefit from this program.

With this system in place, we wouldn’t need a minimum wage. Working full-time at our current minimum wage makes you $7.25*40*52 = $15,080 per year. If you are a single person, you’re getting $7,865 from the basic income, this means that you’ll still have more than you presently do as long as your employer pays you at least $3.47 per hour. And if they don’t? Well then you can just quit, knowing that at least you have that $7,865. If you’re married, it’s even better; the two of you already get $15,730 from the basic income. If you were previously raising a family working full-time on minimum wage while your spouse is unemployed, guess what: You actually will make more money after the policy no matter what wage your employer pays you.

This system can adapt to changes in the market, because it is indexed to the poverty level (which is indexed to inflation), and also because it doesn’t say anything about what wage an employer pays. They can pay as little or as much as the market will bear; but the market is going to bear more, because workers can afford to quit. Billionaires are going to hate this plan, because it raises their taxes (by about 40%) and makes it harder for them to exploit workers. But for 70% of Americans, this plan is a pretty good deal.

13 thoughts on “Should we raise the minimum wage?

  1. This is an interesting concept that I’ve gotten more and more on board with over time. Especially considering increases in automation in the future, it’s going to become increasingly absurd to look at people who don’t have full-time work as “lazy”. Plus a basic income would allow citizens to comfortably retrain for ANY discipline on their schedule, without being terrified of going hungry in the meantime.

    One question I do have, is what prevents businesses from raising prices to capitalize on everyone suddenly being richer, thereby negating the basic income?

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    • In a word? Competition. As long as product markets are reasonably competitive, corporations won’t be able to raise prices very much without losing business to other corporations who didn’t.

      Of course in real life, there’s lots of collusion and monopolistic competition, which is a problem; but it was already a problem before the basic income came around. We need to give antitrust enforcement its teeth back and start breaking up monopolies. Here are a few places to start: Hasbro, Apple, Walmart, Comcast, News Corporation.

      I do think there would be some inflation as a result of the basic income, just because people would have more money to spend and this would increase aggregate demand. But in a depression that’s exactly what you want; right now our problem is insufficient aggregate demand and inflation that is getting too low, not too high.

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  2. The guaranteed basic income sounds great in principle, but how do you get people on board with it in America’s political climate? There is a deeply ingrained idea, here in the United States, that we must work to receive money, and in this way, we are uniquely in control of our own destinies. Those who don’t work, even in the worldviews of many liberals, are basking in luxury.

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    • That is a very good question, and I do not yet have a compelling answer. I am open to suggestions.

      Right now I have basically three strategies in mind, though I confess I doubt that they are sufficient:

      First, simply to point out ad nauseam the various benefits the basic income would have for our society. The end of poverty is just the beginning; we would also see an enormous boost in consumer spending, triggering a new surge in manufacturing output; bargaining power for workers would dramatically increase, raising wages; inequality would be reduced; economic efficiency would improve; we might even see a surge in artists and entrepreneurs, as people who always wanted to create something never could because they were too busy working full-time just to survive. It is an exaggeration to say that a basic income would solve all of our economic problems—but it is not a very large exaggeration.

      Second, to compare the basic income to other forms of non-work income such as dividends, inheritances, and interest. What did the stockholders do to earn their dividends? What did heirs do to earn their parents’ money? When a credit card company receives that 20% you pay them every year, what exactly did they do to earn it? Eliminate all these sources of unearned income (which are almost entirely taken by the rich, by the way) and then perhaps we can talk about whether a basic income is unfair to those who work.

      Third, to discuss a broader sense of earning and ownership, on which we don’t have to be constantly working at the behest of some employer to be considered citizens who pay our dues to society. We volunteer, we care for our families, we vote for public office, we pay our taxes, we have hobbies that can lead to new ideas and skills. More than that, we are human beings, with certain fundamental rights: Life, liberty, and the pursuit of happiness are all impossible in real terms unless you have a certain minimum standard of income. If you cannot afford food and shelter, where is your right to life? If you cannot afford transportation or communication and your elections are controlled by million-dollar campaign donations, where is your right to liberty? And if you don’t at least have some basic opportunity to improve yourself and advance in society, where is your pursuit of happiness?

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  3. […] Economists are currently quite divided over whether minimum wage is beneficial or harmful (I lean toward beneficial, but I’d prefer a better solution), as well as how to properly regulate unions so that they give workers much-needed bargaining power […]

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